The coronavirus pandemic has for the first time in the last several quarters pulled down the CII-IBA Financial Conditions Index to below 50 mark, reflecting worsening of liquidity situation, external financial linkages and economic activity.
This fall in the CII-IBA Financial Conditions Index for the first quarter of 2020-21 is primarily due to the outbreak of coronavirus that has sent economies and financial sector across the world into a meltdown, industry body CII said.
The Index for the first quarter of the current financial year stood at 44.2. It was at 60.5 in the preceding quarter (January-March FY20).
"With a series of lockdowns happening across the world bringing economic activities to a virtual halt, organisations in the global arena are uncertain about the whereabouts of their cash flows and business prospects. India is not an exception," it said.
The CII-IBA Financial Conditions Index was launched in April 2015 to serve as a key indicator in assessing the short-term financial conditions in the Indian economy and provide effective monitoring of current financial conditions for facilitating regulatory and policy decisions.
The Index was also aimed at generating early signals on turning points in financial conditions and help in tracking credit flow conditions for industry and service sectors from various channels.
A total of 22 entities participated in the Survey that includes nine public sector banks, five private sector banks, two foreign banks, and one cooperative bank. Representing other financial institutions, five leading non-banking financial companies (NBFCs) participated in the Survey.
Releasing the index for the first quarter of 2020-21, CII Director General Chandrajit Banerjee said the impact of COVID-19 has been much worse than the financial crisis faced by the world including India in 2008.
While the lockdown was necessary to mitigate the impact of coronavirus on the population, it has had dire implications on the financial conditions of the economy, he said.
"In this hour of need, banks along with NBFCs and MFIs (microfinance institutions) have the ability to ensure smooth and continuous flow of credit, particularly to MSMEs, farm sector and retail sector and ensure some economic activity.
"The measures announced by the government and the RBI (Reserve Bank of India) have come as a big relief to them and with an expected upliftment of the lockdown soon, the financial conditions can only improve," he said.
Commenting on the index, IBA Chief Executive Officer Sunil Mehta said the low reading of the overall index for the first quarter of the financial year is on the expected lines. Coronavirus, he said, has created havoc across the world and India is not an exception. Preventive measures like lockdown would have had an adverse effect on the economy.
"In the present round of the survey, the cost of fund index is reading at 83.5 which is the highest in the sub-indices which essentially conveys that interest rates have come down substantially to facilitate business. Even the liquidity is also comfortable," he said. Mehta added that banks are playing a significant role even during this pandemic and banking services are being offered to the general public without any disruption.
"Going forward, the gradual lifting of the lockdown would help the economy to rebound at a faster pace and would help the businesses and there by employment," he added.
Among the sub-indices, the highest contribution was made by the Cost of Funds Index recording a value of 83.5, which has improved significantly in comparison to the previous quarter.
The Funding Liquidity Index recorded a value of 47.2, which has decreased significantly in comparison to the previous quarter.
The release said the External Financial Linkages Index has recorded an all-time low of 20.5, which is significantly lower as compared to the previous quarter.
The Economic Activity Index recorded a value of 25.6, which has declined significantly in comparison to the previous quarter, it added.
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